China: new stimulus bets

Place your bets. Will China announce new economic stimulus to boost economic growth? Will the world's largest economy and the biggest market between BRICS (acronym to Brazil, Russia, India, China and South Africa) be able to drive a recovery across the globe? What can be said for sure right now is the expectations for new stimulus to boost economic growth in China have been increasing around the world. 

The speculation has risen after the Chinese government announced last week infrastructure plans to build highways, waterways, urban rail and waste water treatment plans estimated in 1 trillion yuans (approximately US$156 billion). The Chinese government did not describe the investments as a stimulus package, but analysts say the measure signals a shift in policy.

Hope for new stimulus measures to boost Chinese economy has increased even more after the industrial figures released yesterday. China’s industrial production grew 8.9% year-on-year in August—the lowest result since May 2009, when the world was in the depths of the global economic crisis. Imports unexpectedly fell 2.6% in July as well, with softened domestic demand.

On Saturday, President Hu Jintao said the “underlying impact of the financial crisis is far from over”. To some analysts, this was another signal that the Chinese government is worried about the economic slowdown and has become open to resorting new stimulus measures. China's gross domestic product (GDP) expanded 7.6 percent in the second quarter of 2012 the worst performance in three years and the sixth straight quarter of easing.

After the infrastructure investment plan, it seems that Chinese policymakers might consider implementing more fiscal measures to support economic growth. Speculation is that the Chinese government will likely act soon, possibly even cutting interest rates.

The Chinese government has taken steps this year to stimulate growth by cutting interest rates twice in quick succession. The government also slashed the amount of funds banks must keep in reserve as ways to increase lending. In 2008, China carried out a huge 4.0 trillion yuan fiscal stimulus package to fight against the global financial crisis. 


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